Tag Archives: Musharraf

‘Not a panacea’- Inflation, private investment and growth in the new Budget 2011-12

Published in the Friday Times, June 10, 2011 in their issue on the budget. 

Current GDP growth estimates for Pakistan are at 2.4%. A figure insufficient to create jobs for the 2 million strong that join the labour force every year. According to IMF estimates an annual growth figure of 8% is needed to absorb the labour force while our target is 4.2%. Inflation, the evil twin of growth, is likely to increase with soaring oil and food prices threatening the current account into deficit. And then with the sad state of our finances, what of foreign donor confidence and private investment?

The budget has come under heat from major economists. Syed Akbar Zaidi for one said that “the finance minister’s speech yesterday was empty and disappointing. It was devoid of merit and failed to identify or address any of Pakistan’s numerous problems.” He went on to say that the budget panders to politicians due to its proximity to the election. Former Finance Minister Shahid Javed Burki was of the view that Hafeez Shaikh’s team consisted of brilliant minds, yet didn’t do much with the budget. Burki is of the opinion Hafeez Shaikh did well with the privatisation portfolio under Pervez Musharraf’s government and should have used his experience to hand over some of the poor performing public sector corporations. “Where will this budget take the economy over the next financial year? Not very far. It will not revive economic growth, not reduce the dependence on foreign flows, not reduce the incidence of poverty, nor integrate the economy with rest of the world.” But as Finance Minister Hafeez Shaikh says, it’s a budget not a panacea.

Key problems identified in the current Economic Survey released by the State Bank are persistent and high inflation, low growth, low revenue collection leading to a high fiscal deficit that continues to add to the overall debt, and a dramatic fall in the investment rate. As Dr Sohail Zafar, Dean of the Business School at the Lahore School of Economics put it, “It’s a gloom and doom scenario, and all attempts to be consciously optimistic are not supported by sane logic and data.”

Of deficits, inflation and other sins: Consider the 4.2% growth target for instance, not impossible to achieve, not enough for our needs and yet a bit ambitious considering last year’s performance. Other targets like decreasing inflation to 9% seem too optimistic. The idea here is that the smaller deficit target will reduce the printing of money and reduce inflation. All this requires strict fiscal discipline, and actually meeting the 4% fiscal deficit target which we bounded over last year.

The central bank has the same view, that the government tightening its belt will decrease inflation, reduce borrowing costs and encourage consumer demand. However, government borrowings have increased 55% since the end of the last fiscal year. In an interview with Bloomberg (June 4), director of the monetary policy department, Hamza Ali Malik said that further tightening would be difficult, “Low growth, high inflation, rising debt. It’s a nightmare for any economy.” Furthermore, Dr Sohail Zafar says that expectations about foreign resources to meet the deficit seem are not likely to be realized.

The core problem facing Pakistan that affects the situation of government expenditures is of taxation and revenues. The tax policy has been somewhat contradictory. On the one hand the finance minister said that only 1.5 million people have filed their tax returns this year, only half of those who are registered and over 70,000 have been given notices. On the other hand the budget raises the taxable income level by Rs 50,000 to give relief. Then there’s a 15% pay increase for government employees, above the 50% increase given last year. How’s that for fiscal discipline?

The one percent decrease in the GST rate, from 17% to 16% will hardy impact inflation. As Irfan Hussain writes in Dawn (7 June), “If international prices of sugar are rising in Chicago, not even a Supreme Court suo motu notice will keep them down in retail outlets across Pakistan. Artificially low prices enforced by the state will only succeed in driving stocks underground, and encourage the creation of a black market.” Which brings us to the issue of subsidies and price control.

Does subsidy removal cause inflation? The decrease in GST is to offset the effect of the withdrawal of exemptions in fertilisers, pesticides, tractors, leather, surgical items, sports goods, carpets and some other sectors. There has been much hue and cry over this cut that this would cause inflation. Speaking at a post-budget press conference on 4th June, Dr Hafeez Shaikh said this would not happen because the subsidies would be made more targeted so they were not misused by wealthy people.

Subsidy removal, without spending the associated savings, may increase poverty due to the rise in input costs relative to the selling prices of products sold by most firms and farms. But the government’s fiscal policy will ultimately determine the effects. Inflation resulting from subsidy removal can be reduced with a conservative fiscal policy. Inflation comes from two sources: the initial increase in general prices due to the higher cost of inputs and more spending by the government as funds are freed up. Therefore, if their goal is to reduce the inflationary effect, the government has to keep spending to a minimum, focusing only on areas that can increase the country’s productive capacity. Our focus is defence (Rs 495 billion) and interest payments (Rs791 billion).

Even with an expansionary policy, to keep inflation low, government spending of associated savings needs to increase purchasing power and raise production. Wasteful public projects which do not add much to the country’s productive capacity should be avoided and private production encouraged. The new growth strategy by the Planning Commission of Pakistan focuses solely on the private sector as an engine of growth.

Pakistan and the private sector: Private investment in Pakistan has been shrinking for some time. Investment in the large-scale manufacturing has declined by 32% (compared to 17% last year). The investment-to-GDP ratio dropped to below 17% last year because of decreasing private investment. The manufacturing sector has been hit the hardest.

An improvement in electricity generation will also have a large impact on production levels and costs in the country. It should kept in mind, however, that such investments may take years to materialise.

It seems that some efforts have been made in this budget to aid private sector growth by reducing some taxes and duties, but they may be too lean. All special excise duties have been abolished. Regulatory duty on 392 items have been abolished. It is now limited to luxury vehicles, cigarettes, arms and ammunition, betel nuts and sanitary ware. Federal excise duty on cement will be phased out in three years. The federal excise on beverages has also been reduced from 12% to 6%. The tax rate on interest income from government securities will be 10% with no tax return requirement. The finance minister also announced on June 4 a five-year tax holiday on loan-free equity investments.

It is unclear whether this budget will do well for industry. Dr Zafar is of the view that there is a disconnect between monetary policy and the fiscal policy embodied in the budget. “Interest rates may be low theoretically, but are too high practically to push the private sector. New investments in the industry are not likely to show improvement during the next year.” But at least no new taxes were imposed to hurt investment.

Saadia Gardezi is a political economist

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‘The spectre of Islamist infiltration’

The Friday Times, May 27th, 2011
In the wake of recent events, the faultlines in Pakistan’s defence forces need to be identified and tackled- Raza Rumi

The recent attacks on the Karachi naval base have once again sparked a debate concerning the much-feared radicalisation within the armed forces. Declan Walsh writing in The Guardian (May 23, 2011) says how the “spectre of Islamist infiltration has haunted the army for decades”. This should be a major concern for Pakistanis. At the same time, Pakistan’s defence forces are well-known for their internal discipline and the overarching ‘unity of command’ that all commanders take pride in.

Nevertheless, radicalisation in the junior ranks has been observed and reported by the national press. In particular, the attempts to kill the former president and army chief Gen Pervez Musharraf revealed the shifting ideological frontiers of the military complex. In June 2009, the Pakistan Air Force (PAF) confirmed that it had arrested or dismissed from service at least 57 employees in connection with botched attempts on the life of the former president. Abdul Islam Siddiqui, a soldier of the Pakistan Army was hanged in 2005 after an in-camera military trial for his alleged involvement in the December 2003 attack on Gen Musharraf`s convoy.

Siddiqui was charged with receiving terrorism training at Bhimber in Jammu & Kashmir (J&K) during August 2002 at a Jaish-e-Muhammad training camp. He further defied military orders to fight in South Waziristan against fellow tribal citizens. It was alleged he remained associated with the Shuhada Foundation, an organisation of the PAF, several of whose officer-bearers wanted to kill Musharraf (Outlook, October 19, 2005).

The plethora of cases relating soldiers influenced by Islamist ideology point to the reported gap between top army leadership and the soldiers. This gap increased as in the aftermath of the 9/11 terror attacks because of Musharraf’s half-hearted attempts to give the Army a liberal outlook.

Earlier, cases of disciplinary action against radicalised soldiers were also reported. In 2003, Major Adil Qudoos, brother of Ahmad Qudoos (who had given protection to Al Qaeda leader Sheikh Ahmad) was arrested in a surprise raid (Dawn, March 23, 2003). In 2005, a military court ordered the dismissal of six officers including Major Adil Qudoos (Daily Times, September 19, 2005).

Another recent case is illustrative: On December 10, 2009, one Col Bashir was arrested by the Pakistani military police along with Squadron Leader Nadeem Ahmad Shah, a retired air force fighter pilot and a former professional JAG lawyer and civilian advocate, and Awais Ali Khan, a civilian mechanical engineer who served with the military’s Air Weapons Complex. Col Bashir had contacts with the Hizbut Tahrir group (Dawn, May 13, 2009). In 2010, Faisal Shahzad was reportedly in touch with an officer of Pakistani Army’s Signal Corps, moments before he parked the bomb-laden SUV at the Times Square (pak-watch.blogspot.com, July 18, 2010).

Radicalised soldiers have also been reportedly creating informal networks. Arshad Sharif’s report in Dawn (14 Sept, 2010) revealed how a disgruntled junior non-commissioned officer formed Jundullah, a militant group with alleged contacts with Jaish-e-Muhammad. Impressed by calls to jihad, 30 other personnel from various army units stationed in Quetta Cantonment joined the new organisation. Some of these officers were also involved in planning botched attacks on Jacobabad Air Base in 2003, in addition to planning two separate assassination attempts on Gen Musharraf. In addition to PAF, Jundullah also tried to establish its influence within different units of the armed forces.

These cases are not confined to the last decade only. In 1995 there was a military attempt to overthrow the government in an ‘Islamic’ coup to reestablish the Caliphate. Maj Gen Zahirul Islam Abbasi, a former commander and officer of the Pakistani Army, was accused and convicted for a period of 7 years for being party to the coup d’état. A total of 40 army officers, including one brigadier and five colonels and 10 civilians were rounded up.

New cables released by Wikileaks reveal how the “elite” groups of “colonels and brigadiers are receiving biased NDU [National Defence University] training with no chance to hear alternative views of the US”. Anti-Americanism within the armed forces is an oft-cited reality though one has no empirical basis to assess its impact and coverage within the institution.

All these reported cases demonstrate that there is a problem with middle and lower ranks. However, it is also clear that the top leadership within the armed forces is cognisant of such trends and has been taking strict action against the errant officials. In the wake of recent events such as the intelligence failure (some say cover-up) with respect to bin Laden’s hideout and now the attack on the naval base, the fault lines within Pakistan’s key institution need to be identified and tackled. Perhaps, it is also time for the command and control mechanisms instituted for nuclear installations to review the situation given how the world is viewing Pakistan’s nuclear assets as ‘unsafe’. These claims may be exaggerated but cannot be ignored.

Shahid Saeed and Saadia Gardezi contributed to the report.

Raza Rumi is a writer and policy expert based in Lahore. Follow him on twitter: @razarumi

WikiLeaks’ Pakistan

The WikiLeaks release of diplomatic cables about Pakistan has shed new light on US-Pakistan relations. The leaked communications reveal Washington’s frustration with Islamabad and the civil-military struggles within Pakistan. Dispatches from early 2010, for instance, quote the aging Saudi monarch calling President Asif Ali Zardari the greatest obstacle to Pakistan’s progress: “When the head is rotten it affects the whole body”.

ISI still in the game: The cables from Secretary of State acknowledge that Pakistani senior officials have publicly disavowed support for these groups, but some officials from the Pakistan’s Inter-Services Intelligence Directorate (ISI) continue to maintain ties with a wide array of extremist organizations, in particular the Taliban, Lashkar-e-Tayabba (LeT) and other extremist organizations.

Biden and Brown on militancy and aid: According to the cable documenting US Vice President Biden’s March 27, 2009 meeting with British Prime Minister Gordon Brown, there was no real possibility of defeating Al Qaeda without also “dealing with Pakistan”. Vice President Biden said he worried that NATO countries in Europe underestimated the threat from the region and viewed the problem as an economic development issue rather than a security issue, despite the fact that Afghan opium is primarily exported to Europe; and Europe has been the victim of several terrorist attacks originating from the region.

During this meeting, Vice President Biden commented that it was difficult to convince Pakistan to commit to developing its counter-insurgency potential as the threat from India made Pakistan devote defence spending to conventional warfare capabilities. Thus in the meantime “we [US] need to develop our relationship with Pakistan beyond its current transactional nature to a long-term strategic partnership. We should begin with $1.5 billion per year in economic assistance that is unconditional and supplement that with military assistance that is conditioned on the modernization of its command structure and active action in the field to combat insurgents. It would be difficult to convince Congress to support such a plan, particularly the unconditional civilian component.”

Biden noted that with the exception of the UK and a few others, very few Europeans were taking action. Brown agreed that there was a significant terrorist as more than 30,000 Pakistanis travel back and forth to the UK each year and two-thirds of the terrorist threats that UK security forces investigate originate in Pakistan. The roots of terrorism in Pakistan are complicated and go beyond the madrassas to, in some areas, a complete societal incitement to militancy.

The Zardari-Kayani-Sharif triangle: US Vice President Biden and US Prime Minster Gordon Brown felt that Zardari’s commitment to combating terrorism was unclear, although “he always says the right things”. The only way to reduce the threat and eventually draw down NATO’s commitment to the region was by increasing the capacity of Afghan and Pakistani security services. The 2009 cable says that Biden commented that Zardari had said to him: “ISI director, and Kayani will take me out”. Brown thought this unlikely and said that Kayani did not want to be another Musharraf; rather he would give civilian leadership room to function. However, Kayani was suspicious of the Sharif brothers and Zardari.

According to leaked cables, Nawaz Sahrif has been telling the US ambassador he was “pro-American”, despite his public stance and thanked the US for “arranging” to have Kayani appointed as the Army chief. US Ambassador Anne W Patterson shot this down by saying that, “The fact that a former prime minister believes the US could control the appointment of Pakistan’s chief of army staff speaks volumes about the myth of American influence here.”

Furthermore, US and General Kayani worried that Zardari would renege on his word of pardoning Musharraf. Patterson’s view according to the cable was that “Zardari is walking tall these days, hopefully not too tall to forget his promise to Kayani and to us on an immunity deal”.

Human rights and the Pak army: Secret cables for the US Embassy in Islamabad address concerns about Pakistan security forces’ human rights abuses against terrorists in Malakand Division and the Federally Administered Tribal Areas. The cable acknowledges the difficult of accuracy but reports from a variety of sources suggested that Frontier Corps and regular Pakistan Army units involved in direct combat with terrorists may have been involved:

“The crux of the problem appears to centre on the treatment of terrorists detained in battlefield operations and have focused on the extra-judicial killing of some detainees… Revenge for terrorist attacks on Pakistan Army and Frontier Corps personnel is believed to be one of the primary motivating factors for the extra-judicial killings. Cultural traditions place a strong importance on such revenge killings, which are seen as key to maintaining a unit’s honor. This fear is well-founded as both Anti-Terrorism Courts and the appellate judiciary have a poor track record of dealing with suspects detained in combat operations such as the Red Mosque operation in Islamabad and have repeatedly ordered their unconditional release.”

The cable also implicates the Khyber-Pakhtunkhwa Police in the abuse of terrorist suspects allegedly responsible for attacks on police stations and says that this is a separate problem from those detained by Frontier Corps and Pakistan Army units. The cable highlights areas for assistance in this regard; creation of new ordinances, reform of prison rehabilitation programs and help from the International Committee of the Red Cross (ICRC), Human Rights Commission Pakistan (HRCP) and the UK government.

Washington worried about Abdul Qadeer Khan: Cables from Hillary Clinton’s office from 2008 say that the US was strongly opposed to AQ Khan’s release and would undermine the positive steps Pakistan had taken on non-proliferation. The document urged Pakistan to consider the long-term gains it could garner from the international community by continuing Dr Khan’s current status rather than the short-term domestic political gains that could result from his release.

Bin Laden and General Musharraf: Anne W Patterson in leaked documents has claimed that Pakistan had concerns that the US would desert Islamabad after they catch Al Qaeda leader Osama Bin Laden. Thus Pakistan feels hesitant in fully cooperating with its key ally. Anne W Patterson said that the relationship between the two countries was one of co-dependency: “Pakistan knows the US cannot afford to walk away; the US knows that Pakistan cannot survive without our support”.

In a meeting held in April 2007, Musharraf told Senator John McCain that although he had no solid evidence, he believed Al Qaeda leaders Osama bin Laden and Ayman al Zawahiri were in Bajaur Agency, since it was in the territory of Afghan militant leader, Gulbuddin Hekmatyar and bordered Afghanistan’s Kunar province. He also spoke about Karzai’s frequent pronouncements about Pakistan’s failure to capture Taliban leader Mullah Omar in Quetta: “Let me tell you, Omar would be mad to be in Quetta – he has too many troops to command in southern Afghanistan to make it feasible. In fact, the only parts of Balochistan with Pakistani Taliban are Afghan refugee camps which we are planning to shut down.”

Musharraf also said that most Pashtuns in Balochistan were traders and had no reason to join the Taliban. They want roads to increase their trade, not to fight. The same could not be said for the Federally Administered Tribal Areas.

Compiled from WikiLeaks archives. The Friday Times, 10 Dec, 2010

WikiLeaks: The Af-Pak conundrum

Nearly as many civilians have died in Afghanistan as Afghan forces.

The Friday Times, 10 Dec, 2010

The cables relating to Afghanistan reveal that beneath public assurances lie deep divisions in Islamabad on issues like Pakistan’s support for the Afghan Taliban and tolerance of Al Qaeda.

‘Stability’ top priority: Cables from Secretary of State Hillary Clinton focus on cutting off the flow of funds to terrorist organizations and achieving stability in Af-Pak as top US priorities. This is to be achieved by effective actions against terrorist fundraising in the Gulf by “Al Qaeda, the Taliban, LeT, and other Af-Pak-based violent extremist groups, all of which undermine the security of the entire international community.” In its ‘talking points’ brief to embassy in Kuwait it is said, “We emphasize the need to prevent the Taliban from using the cover of reconciliation talks to raise funds.”

The Karzai dilemma: The cable’s word on President Hamid Karzai has been far from flattering. Oman’s foreign minister says that he is “losing confidence” in him. A British diplomat says Britain feels “deep frustration” with him, while an Australian official complains that he “ignores reality.” A diplomat from the United Arab Emirates says Afghanistan would be better off without him. NATO’s secretary general speculates that he has a split personality.

Lt Gen Karl W Eikenberry, the American ambassador to Afghanistan in April 2009, was blunt about his criticisms in a July 2009 cable. “It remains to be seen whether Karzai can or will refrain from this ‘blame America’ tactic he uses to deflect criticism of his administration,” he wrote. “Indeed, his inability to grasp the most rudimentary principles of state-building and his deep seated insecurity as a leader combine to make any admission of fault unlikely, confounding our best efforts to find in Karzai a responsible partner.”

An August 2009 report from Kabul complained that Karzai and his attorney general “allowed dangerous individuals to go free or re-enter the battlefield without ever facing an Afghan court.” The embassy was particularly concerned that Mr. Karzai pardoned five border police officers caught with 124 kilograms of heroin and intervened in a drug case involving the son of a wealthy supporter.

Saudi financing: An action request cable from Secretary of State Hillary Clinton in 2009 asserts that Saudi Arabia remains a critical financial support base for Al Qaeda, the Taliban, LeT, and other terrorist groups including Hamas. Riyadh has taken only limited action to disrupt fundraising for the listed Taliban and LeT-groups aligned with Al Qaeda and focused on undermining stability in Afghanistan and Pakistan.

“Saudi Arabia has enacted important reforms to criminalize terrorist financing and restrict the overseas flow of funds from Saudi-based charities. However, these restrictions fail to include multilateral organizations such as the International Islamic Relief Organization (IIRO), Muslim World League (MWL) and the World Assembly of Muslim Youth (WAMY.) Intelligence suggests that these groups continue to send money overseas and, at times, fund extremism overseas. In 2002, the Saudi government promised to set up a Charities Committee that would address this issue, but has yet to do so.”